Mere Gold is Not Enough: Hayek's "Denationalisation"

F. A. Hayek's Denationalisation of Money (1978) made a case for an open market in money, without legal tender laws, and without a government monopoly in currency.  

Hayek's thesis is two-fold.  First, that a competitive market in money will create currencies that are desirable for their enduring value.  Good money drives bad money from an open market.  Second, more broadly, until we have that happy day, we really cannot say what forms and formats will be acceptable or popular.

Breaking with tradition, Hayek stated that being limited to gold ("the wobbly anchor") is contrary to a truly free market.  Liberated from state control, there is no limit to the forms that money can take.  Hayek even suggested that a truly free market might see stable paper money backed by nothing but the credit of the issuer.  Paper money from one bank might promise payment in the paper of other banks.  Still other possibilities exist. 

It is easy see that if a bank issued too many notes then it would soon be redeeming them as a result of financial reporting. That is history.  For Hayek the more interesting problem was what to do when the market value of a bank's paper exceeds its issue price.

 "... but it could preserve this business only if it did in fact promptly buy at the current rate any of its notes offered to it.  So long as it succeeded in maintaining the real value of its notes, it would never be called upon to buy back more than a fraction of the outstanding circulation.  Probably no would doubt that an art dealer who owns the plates of the engravings of a famous artist could, so long as his works remained in fashion, maintain the market value of these engravings by judiciously selling and buying, even though he could never buy up all the existing prints." (Page 49)

This little book is dense with worthy ideas such as that. Most economists express three uses for money. Hayek defined four: cash purchases; reserves for future purchases; standard of deferred payment; unit of account.

F. A. Hayek apparently had little or no experience with numismatics.  Many of his theoretical claims are supported by facts known to those of us who study the art and science of the forms and uses of money. Other of his theoretical assertions are denied by the facts of history. And to be fair, numismatists, schooled in economics by publicly-funded (or aristocratic) institutions, also err when narrating the history of money.  The idea that coins were invented by merchants to make bullion more convenient for retail trade is the best example of such error.  Charles Seltman, the British numismatist who promoted that silly idea via the Encyclopedia Britannica, never worked behind a retail sales counter.   Similarly,  for all their theoretical knowledge Hayek and the other Austrians had no experience as merchants.

 Hayek says that it is unfortunate that there existed no complete history of the experience of government monopoly on money.  However, he does cite Murray N. Rothbard's monograph, What Has Government Done to Our Money (1963, 1974).  That work is little more than a sketch.  Like Hayek, Rothbard had little involvement with the artifacts.  Rothbard relied on "The Use of Private Tokens for Money in the United States," by B. W. Barnard from The Quarterly Journal of Economics, Vol. 31, No. 4 (Aug., 1917).  That academic paper reported all known issues without regard to their actual use.  Today, Bar Cents and Immune Columbia are regarded as rare and likely saw little use in their time.  Nova Constellatio tokens really did circulate.  In short, Rothbard's data was flawed because he gave weight to an academic paper instead of going to numismatists.  Any active collector of American money could have shown him (and Hayek), the material evidence they sought to support their theories.

"The early Middle Ages may have been a period of deflation that contributed to the economic decline of the whole of Europe. ... But where, as in Northern Italy, trade revived early, we find at once all the little princes vying with one another in diminishing the coin - a process which in spite of some unsuccessful attempts of private merchants to provide a better medium of exchange, lasted throughout the following centuries until Italy came to be described as the worst money and the best writers on money." (page 34)

Yet this complaint - common among historians and cited by gold bugs - ignores one of the arguments for gold-based money: with the quantity fixed by nature, each new invention, import, or innovation caused the existing money to increase in value: hard money is worth ever more over time.  That was the case in the Middle Ages as expanding trade brought more products to market.  It is also true that warlords and generals debased their coins, a common cheat in both Roman and modern times, as well.  But that negative motivation was only part of the story.  Absent new discoveries such as the mines of Joachimstal and the looting of the Americas, deflation is a beneficial consequence of hard money.   Moreover, some strong currencies, such as the English sterling penny and the Venetian gold ducat, enjoyed international reputations.  That meant, however, that they left one place and went to another.  For a local ruler to keep his coins in his realm, the issues had to be useful only locally, otherwise the locale would quickly enjoy an influx of imported goods and a loss of currency.

One solution to that is a token currency. The strength of a monetary medium, itself durable and cheap, but also a token for precious metals that do not pass hand to hand was explored by Neil Carothers in Fractional Money (New York, J. Wiley & Sons, 1930), a book that grew out of his doctoral dissertation some years earlier.  Again this data is a century old.  We know these facts; and they support Hayek's theories.

We can see an analogy to Hayek's laissez faire banking via the stock market.  Common stock certificates are a form of money; and historically their format resembled  bank drafts, being only much larger in size.  Stock certificates were issued, endorsed, transferred, and cancelled.  With or without a declared par value their worth fluctuated on the open market.

Knowing Hayek's theory you are perfectly free to use whatever moneys you prefer.  If you live in the USA, you will find Federal Reserve Notes most liquid.  But all manner of moneys are in circulation here and now, if you only know where to look for them.

ALSO ON NECESSARY FACTS

Numismatics Informs Economics

Debt: the Seed of Civilization

Numismatics: the Standard of Proof in Economics
Objectivism and the Gold Standard
Money as a Crusoe Concept
Electronic Money: Coins without Realms

The Sociology of Freedom

Freedom (or the lack of it) does not come to each of us evenly and all at once.  This is explained in Harry Browne's classic, How I Found Freedom in an Unfree World.  That book is a nicely crafted restatement of a libertarian theory earlier expressed by Skye d'Aureous and Natalee Hall in "What if They Gave a Millennium and Nobody Came?"  (Libertarian Connection #13, reprinted in the 1981 Loompanics Main Catalog and in Loompanics Greatest Hits, 1984). 
          Harry Browne examined 14 common Traps that we allow ourselves to fall into, from family to job, to taxation, and including "Burning Issues" and "Rights."  Browne advocated a rational (logical and dispassionate) examination of each limitation on your own freedom.  You must recognize that for each gain, you must pay a price, in order to reap the reward. 
        Skye d'Aureous and Natalee Hall were at once broader and more concise. "An overall decrease in freedom for the general population does not mean an overall decrease in freedom for you, unless your actions are necessarily the same as the general population."  ...  "You will not suddenly become 100% free." They made 15 other points to elucidate the same principles. 
       In fact, these truths coincide with known perspectives from sociology.  Sociology looks at the variability in human cultural experiences and posits axioms of subjectivism.  C. Wright Mills coined the phrase "sociological imagination" which has taken on wider meanings than he intended.  Sociological imagination is the ability to see beyond your own social context to understand that of other people.  The Thomas Theorem says, "If men define situations as real, they are real in their consequences."   Those perspectives support the suggestions of Browne and others that you do not need to become enmeshed in the social world you happen to inhabit.  In fact, we all inhabit many such spheres of life simultaneously. 
     In particular, it is a general prediction that anyone who calls themself a Republican, libertarian, or Objectivist probably has set aside some savings in gold and silver coins that protect those savings against the ravages of inflation.  Wider still, Browne would point out that a job with a fixed salary gives you less freedom to adjust your wages.  Moreover, some would also suggest that actually working for the government might be one way to stay ahead of inflation by participating in its cause.  On the other hand, even the best-paid government employee, a GS-15 (depending in the locale), will top out at about $100,000 to $120,000 per year, confortable, but not wealthy -- and certainly not capable of going to $250,000. 
     Among the wealthiest suburbs in America, measured by household income, are four around Washington DC (Forbes here).  If you want the flexibility of private employment tied to government spending, work for a think tank or a lobbyist.  Of course, for you that might be like being paid to go to prison.  Money isn't everything.  
       Therefore, Browne generally recommends being self-employed at whatever you do best, or at least working at a regular day job that rewards you for your efforts, such as sales.  Of course, that may not be for you.  Your happiness may depend on other choices you make -- and you will pay different prices for different kinds of freedom.  But that freedom is out there.
      What people believe to be true is true in its consequences. This is also dramatized in Atlas Shrugged as industrialist Hank Rearden's legal problems with the Washington planners only reflect his personal life. Even his surrender of Rearden Metal to preserve Dagny Taggart's reputation was a result of that.  If you find yourself trapped by circumstances, then you need to create your own social reality. 

Nerd Nation

The jocks have been shoved aside.  While the Super Bowl has not withered from disinterest,  the fact remains that a significant (if unmeasured) population of  America know themselves to be geeks or nerds --  and are proud of it. 

Big Bang Theory:
Wolowicz, Leonard, Penny, Sheldon and Raj

 I  point to mainstream television programs such as CSI, NCIS, Big Bang Theory, NUMB3RS, and Psych, as well as to the foundation media such as NPR's "Science Friday" (1.3 million listeners), and the long established commercial success of the Discovery Channel and the recently rebranded Syfy ("SciFi") Channel.   It is not just that Big Bang Theory is a prime time television comedy about physicists.  To that must be added Big Blog Theory, the website that offers real physics in support of the comedy.  This is in the instant tradition of the Wolfram Mathematica pages to supplement NUMB3RS when it was on the air, 2005-2010.  On an NCIS episode, laboratory technician Abby Sciuto is waxing on about Bill Nye, the Science Guy.  Her boss, former Marine sniper Jethro Gibbs, does not get the reference.  She goes on.  "Oh," he says, "Just like Mr. Wizard."  She replies with a question mark. 


When Hugo Gernsback launched his science fiction magazines, he intended that they be for everyone.  Still, he insisted that his writers pad their stories with expositions from textbooks, to ensure that the science (however fanciful) was credible.  When John W. Campbell took over, he identified his audience specifically as educated in science, and he courted writers such as Robert Heinlein and Isaac Asimov because of their education. 

At least one good reason to take any science class.

 Fully 28% of Americans claim to have four-year degrees.  In a funny way, the show NUMB3RS reflects that.  While David Krumholtz learned his lines well, his supporting actress, Navi Rawat (Dr. Amita Ramanujan) says that she surfed the web to read popular math to help her delivery.  Beyond that, co-star Judd Hirsch actually majored in physics.  Even closer to the limit, supporting actor Dylan Bruno (Agent Colby Granger) has a bachelor's from MIT in environmental engineering.  Pauley Perrette (Abbey Sciuto of NCIS)'s degree in sociology exposed her to the related study of criminology.

Cellphones and computers have morphed into smartphones and pads.  Clearly, comedy and drama consonant with our culture must reflect that.


Also reflected in that broader culture, is the "CSI Effect" in real courtrooms.  At first, it was a complaint from prosecutors.  Lacking physical evidence, some found it hard to win a conviction.  Or so they claimed.  The problem interested criminologist Gregg Barak of Eastern Michigan University who specializes in the mass media affects on our perceptions of crime.  He enlisted his colleagues Young Kim and Donald Shelton.  They found, broadly, that in fact, the "CSI Effect" is really just a "tech effect."  We expect scientifically valid physical evidence because we live in a technological culture.  Beyond that, however, their numbers showed that jurors with less education demand more evidence.  Jurors with more education tend to take the prosecution's word for it.  Whether this correlates to time spent watching television, or solidarity within social classes is a different question. 

Also on Necessary Facts
Nerd Nation 2.0 (Danika McKellar, Felicia Day, and Natalie Portman)
Nerd Nation 3.0 (Dungeons and Dragons) 
Nerd Nation 4.0 (Gentleman's Quarterly)
Nerd Nation 4.5 (Mayim Bialik)
Where All the Children are Above Average

The Sanction of the Victim

"The sanction of the victim" is one of the many philosophical ideas that are dramatized in Ayn Rand's Atlas Shrugged. 

We all meet conflict every day.  You have an idea that you think would benefit your department or company.  Someone else at the table disagrees and offers a different project. Typically, your opponents do not expect you to destroy yourself to meet their goals.  Sometimes they do.  We vote for taxes; and we elect others who do much more of the same in our name. 

How would you feel, if you went into a gas station or convenience store, there behind the counter was a friendly picture of Osama bin Laden?  Would you shop there again?  What if they had a bumper sticker supporting a ballot proposal for more school funding? 

If I were absolutely consistent about not sanctioning my destroyers, I would never have had a pizza from any of the many shops  in Cleveland displaying Pope John XXIII and Pres. John F. Kennedy. I read The Fountainhead at 16, and Atlas Shrugged twice through by 17, just as I was driving and dating.  Pizza was an important part of my life. 

Many years later, I found an obscure book, from 1960-64, Merchants Make History by Ernst Samhaber.  In the narratives about caravans and caravels, the author says that a good merchant does not argue religion with his client.  Still later, writing the "Internet Connections" column for The Numismatist, I discovered that some of the largest hoards of Muslim/Arabic coins are found in Latvia, Russia, Sweden, and England.  Many examples date from the European "Dark Ages."  

USSR silver ruble from Lenin's
"New Economic Policy"

At some level, civil society requires the depersonalized interactions of the marketplace. This leaves unanswered the question of where you (or I, or anyone) draw the line when you enter into exchange with someone who does not share your values.  Here in Ann Arbor, we have a record store in the old "head shop" tradition.  The walls proudly carry anti-capitalist bumperstickers and anti-imperialist demonstration signs.  I find it ironic.  But their CDs are priced right.

Confronting Post-Modernism and Conservatism

Having just spent five years at college and university (2005-2010), I had too many professors and classroom colleagues to whom I was expected to show respect as they advocated my demise. Government regulations were merely some obvious consequences of a much deeper evil. 

Ayn Rand said, "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."  I first read that in 1967.  So, when I had a graduate class in criminology theory in which the required readings were post-modernist philosophy - the senses are invalid; logic is a sham; reality is socially-defined: Philosophy, Crime, and Criminology by Arrigo and Williams - I was well-prepared. 

As with most classes, of the 20 or so in the room, only about five were active participants.  I know from my first university class in criminology that many do not speak up because they know that their conservative views will be argued down by the professor.  The professor commands the classroom in many ways.  The prof can take five or 50 minutes to make a point.  A student has maybe 20 seconds.  So, when I say "the class" it is not necessarly true that everyone was in accord.  With that caveat, the class nodded along with the claim that there is no absolute right and wrong, that morality is socially constructed, usually by the ruling class for its interests, that different societies have different values, all equally valid, that imperialism and sexism (including hegemonic masculinity) denigrates these other perspectives,. etc., and of course that ultimately any absolute knowledge is impossible.

Then, a woman who worked for the sheriff's department spoke up and denounced Bernard Madoff.  The failures of his investment house impacted our county's unfortunates who were now denied non-governmental aid, especially mental health services, because those charities had invested with Madoff and now were without funds.

I raised my hand.  Wouldn't the sociological perspective include the fact that these Wall Street capitialists have their own society with their own rules?  These fund managers were in the same league with Madoff. These were not little people, but professionals, so if they got cheated, that is just an outcome in their world, equally valid for them. 

Of course there were dissenting noises from actual words to groans to raised hands.  "Wait a minute!" I begged.  "So, there is a difference between right and wrong."  (Silence.)  There is a difference between right and wrong and you can know the difference between right and wrong. 

The discussion moved on.  The professor delineated two schools of post-modernism, his and the authors'.  I was satisfied that I made my point, even if no one was persuaded into an understanding they did not come in with. 

That, too, was a classroom lesson for me. 

The previous semester, I had a class in international economics.  The professor was a Marxist, one of the old school who believed that economics and history are sciences.  Most of the class were foreign students.  The largest fraction (6/20) were from China, but about a third were from Muslim/Arab countries.  Three were from different subSaharan nations.  The rest were from here and here; and three of us were Americans. One American was on the far left.  I held the right wing.  Most of the class were arrayed near the center.  These were business majors, largely, but populists and democrats, nonetheless.

One week, the subject was extractive industries.  Even my capitalist limits were tested by the stories of these Fortune 500 B-School looters who cozy up to dictators, strip the minerals, and leave the peoples and the lands worse off.  There was another subject that week as well.  As a graduate class, the workload was non-trivial.  I wrote on the other subject.  When the papers were handed back, the professor said that he was dismayed and disappointed.  Apparently, several people wrote about the good things these companies do, the roads, hospitals and schools they build.  It was not what he expected at all.

To me, the lesson was that people have their own ideas.  You can find agreement, or not.  Actually bringing new information that changes someone -- the teaching moment -- is rare. 

No one comes to a college or university with no ideas.  Mostly, we absorb what we learned at home.  Sometimes, new learning by young people awakens new processes.  But today's university students are not necessarily recent high schoolers away from home for the first time.  Education in America is driven by mature learners. The consequences of that remain to be seen as one generation replaces another in the stream.  For the present, I have to deny the complaints of conservatives, libertarians, and objectivists that college professors brainwash students, propagandizing them with barrages of falsehoods.  After one such session in Sociology 101, leaving the building, behind me on the stairwell were two girls, a full generation or more younger than I.  Said one to the other in a nattering tone of voice, "America sucks, America sucks, week after week it's the same stuff: America sucks."  Obviously, she was not buying what the instructor was selling.  She had ideas of her own to begin with; and change them as she might, that choice would be hers.